Does Straw Purchasing Violate Manufacturer Channel Commitment?

John Honovich

Many manufacturers pledge to only sell through the channel, i.e., never sell direct to end users.

However, one tactic we have heard on numerous occasions is manufacturers finding small re-sellers, often not even in the security business, and having them route sales the manufacturer negotiates directly with the end-user. The small re-seller might get a few points and is used to avoid the problems of 'direct' selling to the end user.

What do you think? Have you seen anything like that? Do you think such tactics violate manufacturer's stated commitment to the channel?

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Brian Karas

I've seen this done first-hand a few times. In every case that I can recall, it was not due to a manufacturer wanting to cut a partner out of a deal, but because the end-user was an anomaly and more or less insisted on a direct purchase arrangement. In one such case the end-user was a large federal entity that did ALL of their own installation, service, etc. They had several techs that were trained and certified on the products they used, and otherwise were as competent as an average integrator.

In many cases "normal" integrators did not even want the pass-through sale, they viewed the moderate margin (6-8 points on a $150,000 deal) not worth the future risk of having to offer some sort of warranty support or otherwise getting caught in the middle of a deal they had no control over. I did not really blame them for taking that approach.

For my experiences, integrators did not really care when this happened, because they recognized they had no shot at the business themselves anyway. They were not invited to bid, they were not consulted along the way for product demos, comparisons, etc. The end user was never going to come back later and ask them for a labor-only or service-only bid, so in the end they did not see it as anti-channel because they were never going to get that order anyway.

On the flip side, if there was a case where the end-user was one that would have normally bought through a traditional channel and the manufacturer orchestrated one these "obfuscation sales", then they would get understandably upset.

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Brian Karas

There was no deception, it was not being denied that this was happening.

Some manufacturers do call it a "national account" and sell direct, but this funneling through a middle man may also be done for other financial reasons.

In another scenario I was involved in (different industry, same channel concept) we (as a manufacturer) were selling direct to a large bank. That bank's policy was that new vendors were entered into the accounting system once per quarter (at the end of the quarter), then you could submit your invoice to payment, and then their net-60 terms would kick in. So, we waited something like 4 months to get paid after shipment of $250,000 worth of gear. I would have loved to send that deal through some middle-man distributor to get faster payment, especially for a small under-funded startup where less-money-now was better than more-money-later.

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Undisclosed Integrator #3

Yes that happens. What I have seen is the retailer setting up a "security dealer" company. Usually one or two people to manage the purchases, subcontract the labor and so on. Everyone can then put their hands on their hearts and say they followed normal business and sold to a dealer.

Then there were those where the customer was large enough to demand of the manufacturer that they were paying $X for the products (usually millions of dollars of product) and it was up to the manufacturer to figure out how they could make the deal work if they wanted the business. Needless to say the integrator was the first to be cut out of the equation. Due to lack of margin of course.

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Michael Silva

Over the years, I have had many clients who have wanted to bypass the normal channels and buy direct from the manufacturer. Most of these clients were Fortune 100 companies and used to getting their own way. In several cases, the purchase was handled just like Brian described - the purchase was funneled trough a local integrator who got a small percentage of the sale but was otherwise not involved in the transaction.

In a couple of other cases, the manufacturer simply asked the client "what integrator would you like to work with?", and immediately made whatever company the client named as an "authorized dealer" of their product - throwing any existing dealers in the territory under the bus.

Not fair and not ethical, but that's the way the real world seems to work. Dangle a PO in front of a manufacturer and requirements for the use of an authorized "partner", factory trained technicians, etc. seem to get thrown out the window.

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John Honovich

Not fair and not ethical, but that's the way the real world seems to work.

The ethical issue is violating one's commitment, not the sale itself.

For example, one large manufacturer regularly declares variations of:

we sell everything to the channel, never cut the channel out

If a manufacturer is up front with their channel partners, "Hey we sell to anyone, that is how our go to market works" then such straw purchasing moves are understood / clear. But if they make a big deal out of 'never cutting the channel out', than such moves are deceptive / unethical, yes/no?

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Marty Calhoun

It is Un-ethical and it may be 'the way the world works' on some levels but the relationship with the supplier is critical in doing business. Any supplier that operates in that fashion will screw the integrator at any time and cannot be trusted. Many of our suppliers and their representatives I have developed what I feel like is an honest working relationship with over the years and if I was made aware anyone of them did underhanded crap like that I would have a hard time making the next purchase and I would make it known to many constituents.

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Undisclosed Integrator #4

This reminds me, every Axis conference (except this last one) Axis would have this guy from Celebrity Cruise Line speak about how great his relationship is with Axis, how great their cameras are etc. Now remember, this conference is about their partners, distributors and integrators, not end users.

So the guy every year blabs on about how great Axis is, that he is buying 1000's of cameras, how he loves "so and so" at Axis, how he's been to Sweden more than once etc. etc.

But ask me who the integrator is, not a clue? Has the integrator ever got up and spoken, no. My point is this guys relationship with Axis is fine, I get how the world works but flaunting him in front of me as an integrator, well that isn't smart, it is disingenuous in my opinion.

Same thing with Avigilon, you can't go around saying how important quality integrators are, that you value the channel and then open up ECs and HVAC contractors.

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